EPAct 179D Experts

"The least expensive kilowatt, is the one not used."

- Jacob Goldman

Abundant Natural Gas Heats up A Large Tax Incentives for Gas-Fueled Building Energy Equipment

Recent U.S. large scale natural gas finds and major improvements in U.S.
natural gas distribution infrastructure are giving U.S. property energy
managers and facility managers the confidence to invest in highly energy
efficient natural gas building equipment. Tax professionals knowledgeable about
Section 179(D) of the Energy Policy Act (EPAct) and the 10% Combined Heat and
Power (CHP) tax credit or cash grant can help their companies implementing
natural gas equipment projects to achieve substantial energy cost reduction and
receive large tax deductions.

The EPAct Tax Opportunity

Pursuant to Section 179(D) of the Energy Policy Act (EPAct) and it’s
underlying ASHRAE (American Society of Heating Refrigeration and Air
Conditioning) building energy code, commercial buildings are eligible for
energy efficiency tax deductions of up to $1.80 per square foot.

If a building’s energy reducing investment doesn't qualify for the
full $1.80 per square foot deduction, deductions are available for any of the
three major sub-systems: lighting, HVAC and the building envelope. Each
component can qualify for up to 60 cents per square foot EPAct tax deductions.
The building envelope is anything on the perimeter of the building that touches
the outside world including roof, walls, windows, doors the foundation and
related insulation layers. Increased natural gas availability creates new
potential for HVAC EPAct deductions, as several options for highly efficient
natural gas heating systems are becoming increasingly popular.

The Combined Heat & Power Tax Credit

Pursuant to Internal Revenue Code Section 48, companies or individuals
installing Combined Heat & Power HVAC systems (CHP) can take a 10% tax
credit for the total equipment and installation cost. In addition, sections
1104 and 1603 of the American Recovery & Reinvestment Act of 2009 allow for
the taxpayer to take the 10% tax credit as a cash grant, although grant
eligibility is contingent on commencing construction of the CHP system before
year end 2010. The requirements for “beginning construction” have
not always been clear; however, the Department of Treasury recently released
guidance that officially explains the requirements for taking a cash grant in
lieu of a tax credit1.

The New Natural Gas Finds

The recent and unanticipated U.S. natural gas reserves boom can be summed up
by the 200 trillion cubic feet Louisiana natural gas find called Haynesville
Shale2. A find at this magnitude is equivalent to 18 years of
current U.S. natural gas production. Another surprisingly huge
strategically-located find is the Marcellus Shale Appalachian (“The
Marcellus”) find3. The Marcellus is primarily located in
Ohio, Pennsylvania, West Virginia and New York. Portions of this huge find
touch Virginia, Maryland, Tennessee and Kentucky. Other huge new natural gas
finds have also occurred in Texas and Arkansas. One industry produced study
estimates that the U.S. has more than 2,200 trillion cubic feet of natural gas
ready to be extracted which is enough to supply 100 years. Less than ten years
ago the consensus was that natural gas production was facing a permanent
decline. The graph below presents the recent major swing in US natural-gas
reserves:

The Large Companies Sense Opportunity

The expected large impact of the recent natural gas finds can be evidenced
by the recent involvement in the natural gas sector of major oil companies. In
late June 2010, ExxonMobil completed its merger with XTO Energy. It is now
expected that Exxon will be a player in the development of renewable resources,
specifically natural gas, under the XTO name4. Royal Dutch Shell and
Total SA also recently purchased natural gas assets, having purchased East
Resources and a part of Chesapeake Energy respectively5. As oil
drilling becomes more inaccessible, and the cost of gas development continues
to plummet, natural gas is going to become essential to the oil and energy
sectors of the United States.

Improved Natural Gas Distribution

The advantage of having huge new natural gas finds in multiple regions of
the country is that it can more easily be distributed to major markets. For
example, the Marcellus find is in a great location to supply the winter regions
of New England and the large market areas requiring winter heating such as New
Jersey, New York, Pennsylvania and Ohio.

On December 29th 2009 Spectra Energy announced the signing of agreements to
supply natural gas into New Jersey and New York with Chesapeake Energy
Corporation, Con Edison and Statoil Natural Gas. In its first stages this added
system will connect to the existing Texas Eastern Transmission and Algonquin
gas transmission pipeline systems. The project is expected to include a 16 mile
pipeline extension connecting Staten Island to New York City and five miles of
large diameter pipeline to New Jersey and New York.

Direct Fired Natural Gas Heaters

Because lighting represents the majority of energy use in a non-conditioned
space, whenever a property owner is considering a heater retrofit it should be
completed before or currently as a lighting upgrade to highly energy efficient
fluorescent, induction or LED lighting in order to maximize the EPAct tax
deduction. The following chart illustrates the potential EPAct tax deductions,
for warehouses and industrial buildings where a high efficiency natural gas
heater is installed with an energy efficient lighting upgrade:

Hybrid Gas/Electric Chillers

A hybrid chiller conditions a building using natural gas or electricity as
alternative fuel sources. It is programmed to use gas in the summer months when
electricity is more expensive and electricity during the winter months when
natural gas is more expensive. Because a hybrid chiller takes advantage of
time-of-day energy pricing and seasonal gas and electricity pricing to
drastically lower building energy cost, and EPAct tax deductions are driven
solely by total building energy cost reduction, the installation of a hybrid
chiller will typically qualify for large immediate EPAct HVAC tax
deductions.

Combined Heat and Power Systems

Combined Heat and Power systems, sometimes known as cogeneration facilities,
are able to generate electricity while also producing thermal energy,
essentially providing usable heat from the waste heat given off during the
electrical generation process. Because CHP systems capture that waste heat,
facilities relying on CHP can eliminate redundancy in their systems, reducing
overall energy use and lowering overall building emissions. CHP systems are
preferred by the U.S. Department of Energy and the EPA because of their energy
efficiency and greenhouse gas reductions7. Also, installation of a
CHP system will help a company comply with the EPA’s July 2010 pollution
emissions reduction proposal, which will affect 31 states and Washington D.C..
Typically natural gas is the fuel used in these highly energy efficient CHP
systems8. In addition, CHP facilities are eligible for the 10%
Federal tax credit or cash grant mentioned above.

Conclusion

Huge new natural gas finds and improved natural gas distribution is going to
enable building owners in cold winter jurisdictions, particularly in the
Northeast, to have assured supplies of natural gas. Informed property owners
can use section 179(D) and 10% tax credits or cash grants to help reduce the
cost of the required heating equipment.